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Procurement: CFOs’ Right Hand in Managing Costs, Risks and More

Cost control, risk management, technological advancements and talent development; those are some of the key issues that are currently top of mind for chief procurement officers (CPOs) surveyed, showing that they share plenty of common concerns with CFOs beyond cost containment. More broadly, CPOs also want to elevate their function to play a more strategic role with finance and the business, according to results of Deloitte Touche Tohmatsu Limited’s Global Chief Procurement Officer Survey 2016, which polled (in conjunction with Odgers Berndtson) 324 senior procurement executives from companies in 33 countries with combined annual revenue of $4.4 trillion.

“Overall, the Global CPO survey findings have a ‘back to the future’ aspect to them,” notes Ryan Flynn, principal, Deloitte Consulting LLP, during a Deloitte webcast, “Procurement’s Evolving Role: What CFOs Need to Know.” “They represent something of a return to the past in the form of a renewed emphasis on cost control, but with continuing efforts to move procurement into a more strategic, digitally enabled function focused on the top and bottom lines, both critical to finance.”

Mr. Flynn pointed to five specific survey findings that support the idea that CPOs are simultaneously being asked to concentrate on priorities that some may have thought they had moved on from even as they also work to redefine their roles to focus on the top line as well as the bottom line. The first is a renewed emphasis on cost control in the face of an uncertain financial outlook at both the business and macroeconomic level. The second is an increasing but still somewhat limited role for procurement in managing supply chain risk. The third centers on digital technology, which is receiving more investment but perhaps not enough strategic context. The fourth and fifth findings concern the importance of talent development and the scope of their own corporate influence, issues about which CPOs report both progress and regression.

Cost control is first among equals on that list: 74% of 320 survey respondents indicated that cost reduction is a primary focus for procurement. “CPOs received a very strong message from their boards and senior management to really focus on cost control,” Mr. Flynn says. “To some degree, it appears that the elevation of the procurement function to a role where it delivers top-line as well as bottom-line value remains something of a dream deferred. For example, in the latest survey, fewer CPOs reported that they were being asked to support top-line growth through greater involvement in areas like new product development and M&A activity than in the previous survey,” he adds.

That said, when CPOs were asked what levers they would pull in order to help their organizations generate value, respondents cited a mix of traditional cost-cutting efforts and more long-term, strategic initiatives (see chart above).

A Larger Role in Risk Management?

As the surveyed procurement executives focus on strategic issues such as increasing supplier collaboration and restructuring the supply base, they also see the potential to play a larger role in risk management, which will require them to address a question that many CFOs are also grappling with: who owns risk? “As the stewards of supplier relationships, it’s critical that CPOs play a larger role in helping to manage risk,” Mr. Flynn says.

Dan Kinsella, Advisory partner, Deloitte & Touche LLP, who also presented on the webcast, notes that “CFOs and boards are focused on many forms of risk, from financial and cyber to regulatory and reputational. They are also examining who should be responsible for risk, and how it should be addressed across the extended enterprise, beyond the four walls of an organization. We’re seeing procurement leaders play a bigger role there, particularly when it comes to operational risks, because often they are on the front lines in terms of relationships with third parties.”

Companies can improve that aspect of operational risk by assessing the potential benefits of an agile and flexible governance model. “There is no doubt that most organizations, certainly those that are large and have global operations, have islands of procurement,” Mr. Kinsella says. “A strong governance model can help organizations ensure that these islands are organized, focused in the right direction, and able to provide the risk and performance indicators that boards are increasingly asking for.”

While the procurement function is well-positioned to manage a variety of third-party relationships, Mr. Kinsella notes that CPOs’ internal relationships can determine how well the function can broaden its purview beyond cost-containment. The most important relationship, according to the Global CPO survey respondents, is with the CFO (cited by 96%), followed closely by the CEO (94%); both of those figures have trended up every year since 2011, the first time the survey was issued. Despite that, only 32% rate the progress of the procurement function in becoming a “strategic business partner” as excellent, while 65% consider such efforts “mixed”.

“This is a real challenge for procurement,” Mr. Flynn says. “Engagement and influence with the business are critical to being able to drive savings in a way that adds more value. It’s not too hard to get savings from aggregating your spend and from putting more spend under management as a procurement organization. But when you get into more complex levers for generating savings” he adds, “things like demand management, specification rationalization, and closer collaboration with suppliers, those require a lot more back and forth with the business, and the ability to influence the business.”

How Talent and Technology Impact Procurement Strategy

Two factors that can help procurement get to the next level are talent and technology. While significant progress has been made in terms of the role that technology can play, talent remains a challenge. Two years ago, 52% of survey respondents said they had the talent they need to deliver on their procurement strategy. That figure fell to 38% in the most recent survey.

Part of the issue appears to lie in recruiting and training budgets: 30% of CPOs reported that their training budgets are less than one percent of their operating budgets, which, as Mr. Flynn notes, “is far below what many would consider to be a healthy level.”

Surveyed organizations with a well-developed talent strategy are focusing on four main areas: planning for the workforce they want tomorrow versus the one they have today; delineating the specific skillsets they need; considering how to leverage outsourcing, offshoring and technology to address lower value-added activities; and thinking through their operating model to better understand where procurement should play a leading role. Once those questions are answered, organizations can develop a strategy for attracting and retaining the right talent.

Those efforts can get a boost from the deployment of new technologies. Indeed, the number of procurement executives who said their organizations are investing in various digital solutions moved up markedly in the latest survey. Self-service portals have been adopted by 70% of respondents (up from 43% in the prior survey), while cloud-based computing, mobile technologies and social media all showed double-digit increases in adoption.

“There are other nontraditional technology levers an organization can consider,” suggests Vinay Rajani, managing director, Deloitte Consulting LLP, who presented on the webcast. “Robotics process automation, or RPA, is a technology platform that can automate a number of manual tasks.” Among the key benefits of RPA, Mr. Rajani says, is the fact that it may not require any additional investment in hardware, can run on users’ desktops or virtual machines, reducing or eliminating impact on core IT systems, and can be programmed to run tasks that are repetitive in nature, such as accounts payable processes, reducing the number of manual touch points needed to address a given task.

Procurement executives are also exploring various sensor-based technologies at the heart of digital supply chains, as well as cognitive analytics, which can improve the speed, accuracy and predictability of spend analysis. That said, the survey found that only 40% of responding companies have a clear digital strategy, and 22% say they aren’t even exploring one at this time. “CPOs are joining the digital bandwagon,” Mr. Flynn says, “but if they don’t have clear alignment with the organization’s wider digital strategy, the investments they are making may be curtailed.”

Even without a clear strategy, however, the future of the procurement function seems likely to be shaped by an increasing embrace of all things digital. Indeed, “leading procurement practices may soon be defined less by the war for talent and more by the war for technology,” suggest Brian Umbenhauer, principal with Deloitte Consulting LLP in the U.S., and James Gregson, partner, Deloitte UK, who co-authored the 2016 Global CPO survey. According to the authors, if the emergence of cloud computing ushered in an era of ‘procurement 2.0’, further technology innovations could accelerate ‘procurement 3.0,’ helping to ensure an impactful and dynamic future for the function.

About the Survey

Conducted in association with Odgers Berndtson, the Global CPO Survey is an annual survey of chief procurement officers across the world. The survey comprises a benchmark indicator of sentiment in the procurement function. The report is based on data received between 2011 and 2015. The 2016 edition contains responses from 324 senior procurement leaders from organizations in 33 countries, who have a combined annual revenue of $4.4 trillion. The Americas sample includes 93 North American and five South American respondents.

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